The Art of Giving

Americans are notoriously generous, both with their money and their time. Our government recognizes two basic forms of gifts: gifts to Qualified Charities and gifts to individuals. The former may provide some tax incentives, but care must be taken to ensure compliance with the Tax Code. IRS publishes a list of Qualified Charities in Publication 526, available on the IRS website. Tax deductions are allowed for gifts to those charities, subject to the gift givers’ tax status, which is explained on the IRS website.

The second form of gift-giving takes place between individuals. In every personal gift transaction, there are two sides—the giver and the recipient. From a tax standpoint, the recipient is the winner, as gifts are not considered taxable income under the U.S. Tax Code. Any and all tax liability falls on the gift giver. Note that we are discussing gifts made in lifetime, rather than inheritance.

Under the Tax Code, any real person can give any other real person (this simply means that entities such as trusts do not qualify) a certain amount of money in any calendar year, tax-free. This annual limit is indexed for inflation, and currently stands at $18,000. These gifts will likely not ever be challenged, although the giver should keep complete and thorough records.

Gifts to an individual in excess of the annual limit are allowable, but to avoid the giver being taxed, a Gift Tax Return must be filed (IRS Form 709), which will credit the giver’s lifetime exclusion amount, currently $13.61 Million. Other gift-giving methods are available, and some are important when the recipient is a minor. One of our favorites is 529 College Savings Programs, which are available in various states to all Americans, regardless of residence.

Contributions are limited by the annual non-taxable gift tax maximum, although up to 5 years of contributions may be made upon account opening. Further contributions may then be resumed starting in year 6. Used correctly, the 529 will supply tax-free payments for qualified higher education expenses for the beneficiary. Keep in mind, however, that contributions to a 529 Plan (or other Educational Funding Plan) are not federally tax-deductible.

Far more complex options for personal gifting exist, but they generally involve attorneys creating trusts, for which fees will be charged. Again, neither the contributions nor the attorney’s fees are tax-deductible. Maintaining control of funds in the account is the main highlight of this method of giving, aside from obvious financial benefits to the recipient.

In short, there are no perfect giving options, meaning that if taxes are involved, any tax will only affect the giver. Therefore, when considering making gifts, it is wise to have a thorough discussion with a knowledgeable planner and/or attorney. We recommend a fee-only Certified Financial Planner®.

Van Wie Financial is fee-only. For a reason.

Florida is halfway through another Hurricane Season (officially defined as June 1 through November 30), but is right now just entering the peak of seasonality. Recent years have produced some horrible storms, causing several huge financial losses (those over $1 Billion each). While zealots cite this statistic to enhance their climate change arguments, the truth is much more complicated.

Continued population growth, heavily slanted toward coastal Florida, has stimulated development and demand. Prices have risen accordingly, with the top 2 cities in the country for home price appreciation since COVID-19 being in Florida. Miami and Tampa share this distinction, with approximately 70% increases in home prices. Insurance costs, especially for Homeowners, have been responsive to the large demand and rising prices. High insurance costs are now driving many people out of the home-buying market.

Tallahassee, we have a problem.

Contributing to insurance inflation are lawsuits brought against insurance companies. To me, the easiest thing in the world is to simply blame lawyers for everything that is wrong in society. While our insurance problem has an element of overly aggressive attorneys, no one profession can be blamed for a monumental and complex problem.

Politicians must shoulder some blame, as Florida laws are generous and conducive to lawsuits. Of course, many lawmakers are attorneys, but the body of legislators can help to shift the favoritism back to “the people.” Some changes have been made, but others remain under prolonged discussion.

So far, our real estate prices continue to rise, exacerbated by the COVID-19 migration out of high-tax, overcrowded states. If the Florida market becomes unaffordable to most Americans, the real estate appreciation we enjoy today will begin to fade. A reasonable goal would be stabilization with slower growth.

We hear stories of citizens living in Miami being forced out by unaffordable rent increases. The worst example I have heard involves an overnight increase from $1,500/month to $4,000/month for an apartment in Miami. While extreme, the example is emblematic of a growing concern for Floridians. As I see it, we have a real estate bubble forming, perhaps not as extreme (yet) as in 2008, but foreboding in the absence of changes from our elected leaders.

Recent modifications, stimulated by our hands-on Governor, have created an environment that is once again attracting insurers back to Florida. While 8 new carriers have been approved so far, we have not regained the competitive level lost to the 11 carriers that exited the state over recent years. Competition and new laws are needed to slow or reverse the assault on homeowners’ pocketbooks.

Van Wie Financial is fee-only. For a reason.

Inflation today, while easing, remains ubiquitous and presents a rare point of agreement throughout the country. What to do about it, however, is a divisive topic, and this past week, we were treated to one of the worst proposals in economic discourse — price controls to curtail inflation.

Throughout documented history, pharaohs, kings, dictators, and presidents have implemented mandatory price controls, which have universally failed. Remember the old definition of insanity, whereby the results of a repeated action are expected to differ? Economically, there are no exceptions, despite claims that results will be “different this time.” Actions have consequences. Repeated actions have repetitive consequences. Lather, rinse, repeat.

Free market principles seem always to prevail. If there were only one economic principle everyone on Earth should understand, it is the simple concept of Supply and Demand. John Locke wrote of Supply and Demand in 1691, but Adam Smith is better known for the discussion in his masterpiece, Wealth of Nations, in 1776. Interesting timing, to say the least, coinciding with the American Revolution that would soon display the power of free market economics.

I can’t remember when I first read Smith’s powerful treatise, in which he introduced what he called the “Invisible Hand” that guided the world’s economies. That guiding hand is now known as the Law of Supply and Demand, and woe be to those who attempt to override its power. Yet our fearless leaders and wannabes occasionally feel compelled to try.

The 2024 version of (economic) insanity is on display in recent calls for “anti-inflationary” price controls. While the rate of inflation is waning, it leaves an overpriced country in its wake. Price Controls, which possibly will morph into Wage and Price Controls, present an even more comprehensive dumb idea.

Fortunately for all Americans, voters of a certain age have experienced the abject failure of Wage and Price Controls. President Richard Nixon attempted to “fix” inflation in 1971 with a 90-day freeze on all wages and prices. During those 90 days, we should have experienced zero inflation, right? Not so much. Instead, employers added non-taxable fringe benefits galore to retain and hire employees, while satisfying the unworkable price stability laws. Health Care and other items rose in price as demand soared.

The laws of economics are irrefutable. Results do not vary through repetition of experimentation. Rather, outcomes are predictable, and price controls present no exception. Inflation is the result of too much money being introduced into the economy by deficit spending. When will we ever learn?

Van Wie Financial is fee-only. For a reason.

For the first time in American history, we are being told by the U.S. Centers for Disease Control and Prevention (CDC) that life expectancy has decreased in recent years. This is contradictory to what we all experience day-to-day, and perhaps no better evidence is available than right here in Florida. Surrounded by healthy, intelligent, and involved 70-somethings and beyond, statistics telling us that people are dying younger require examination.

Life expectancy is a largely misunderstood concept and must be considered on a case-by-case basis in order to be useful in responsible financial planning. Over many decades, Americans’ life expectancies rose steadily, fueled by advances in medical science, nutrition, and overall lifestyle, including safer work environments. Assigned at birth, life expectancy is applied based on actual experience of people, both alive and deceased. The concept is a forecasted average, a statistic that, like all statistics, must be clearly understood.

According to CDC, about a decade ago, Americans’ life expectancies stagnated, and then began to fall. The implication is that newborn babies will not live as long as their 10 and 20-year-old counterparts. This is true only in the statistical sense. In actuality, people who survive their mathematical danger points will live longer than ever. Life insurance statistics show that potentially lethal events include learning to drive, entering military service, and illegal drug use, rampant in inner cities and on college campuses.

Later on in life, diseases come into play, with heart attacks, various cancers, and a recent pandemic, taking many lives. While these perils claim Americans of all ages, modern medicine and healthy lifestyles lessen their lethality. Survivors now join healthy Americans with lengthened life expectancies. Regardless of statistics, planning for a long life is critical.

Americans fear two concepts more than they fear death itself. Public speaking is one, and we can’t do much to help people with that. The Big One, though, is running out of money. Enter financial planning. We can and do help with that.

Early deaths, those that distort the life expectancy tables, must be statistically ignored when planning for a long retirement. Thirty years is now commonplace, and more is possible. In our Retirement Planning, we generally consider the target to be at least age 100, with a goal of being financially stable throughout the entire period. Planning for less may result in disastrous financial outcomes. Live long and prosper. Despite early dangers, Americans have a great opportunity to enjoy life.

Van Wie Financial is fee-only. For a reason.

In the past week, the S&P500 Index logged a total of 838 points (intra-day volatility), on its way to closing flat for the week. Between the highest high and the lowest low was about 240 points, or 4.4% of the closing price. All for nothing, one might say. However, volatility serves a purpose, and is essential to maintaining and growing a profitable investment portfolio over time.

Much of the “real” money (meaning the real big money) is actually speculative, rather than “buy and hold” investors’ portfolios. Individuals generally lack both the time and expertise to be involved in frequent stock trading, and most who try to “beat the market” underperform their own assets.

What does that mean? Over time, a stock, an index, a mutual fund, or an Exchange-Traded Fund (ETF) amasses a performance record. Over the same time period, many investors buy and sell shares in those investments, often frequently, and most of those traders do not match the performance of the asset itself. Chasing market returns most often produces abysmal results.

The reason for underperformance lies in a very human desire to perform better by taking periodic action, rather than just sitting back and waiting. This practice is called market timing, and while it can be exciting, it generally fails. This week illustrated why, far better than words can portray.

Using the Dow Jones Industrial Average (DJIA) as our example, this week’s action would dizzy any sane investor. Monday’s 1034-point drop instilled fear enough in investors to cause many to sell perfectly good assets. Conversely, Thursday’s 683-point gain elicited seller’s remorse, and many repurchased their sold assets. This is a formula for underperformance. It makes my head spin.

Professional traders have experience and tools to react better than ordinary retail investors. They move huge sums of money on a daily basis, and are not afraid to make important decisions. Many are institutional money managers, representing hundreds or even thousands of individual participants, allocating block trades among them. For a price, of course.

Also in the trading arena are stockbrokers, making trades for their customers, while generating commission income for themselves. All these big players add to the market volatility on which they (hope to) thrive.

For the right people and individual traders, volatility also can add excitement to their lives. For the rest of us, it is a necessary evil. We understand that long-term investing has ups and downs that must be accepted during the process. Not to say that nothing ever changes, as portfolios, like their owners, evolve over time.

During time periods similar to the week just passed, high volatility can affect our mental equilibrium. Would someone please pass the Dramamine®?

Van Wie Financial is fee-only. For a reason.

One month ago, in this Blog, I wrote: “This is the best of times, this is the worst of times (my apologies to Charles Dickens). Having spent my considerable adult lifetime studying economics, investing, and personal finance, I cannot remember a more confusing economic landscape. Advising clients as to their financial future options requires balancing pros and cons of the national (and world) economic outlook. Our crystal ball is hazy.”

Throughout the ensuing month, our crystal ball has remained hazy, but we may be seeing a slight clearing through the fog. This week brought the FED meeting, which produced zero surprises. And the market loved it.

For a few hours.

Suddenly, traders woke up on the wrong side of the bed the next morning. A series of reports began to be published, suggesting new fears of recession. Is this warranted? Following are a few of our observations.

The Unemployment Rate is figured differently than when I was an economics student – today, we use the U-3 Unemployment Index, rather than the old U-6, which today’s rate is 7.8%, not even close to the current 4.3% U-3. Manufacturing is in a downturn, contracting in 20 of the last 21 months. The new Purchasing Managers Index for manufacturing dropped to a contractionary 46.5.

Gas prices are up 46% in 3-1/2 years, taking money out of the pockets of Americans, whose spending accounts for 70% of our economy. Overpaying for energy creates no economic benefit, instead robbing consumers of purchasing power. Exorbitant grocery prices have a similar deleterious effect. Overall food prices are up 19.2% during the current Administration.

July jobs reports were dismal, relative to expectations. Inflation, while declining, remains prevalent and punishing to consumers. Wages have not kept pace with inflation, and that doesn’t even include the effects of taxation, which reduces spending power.

The bottom line is still difficult to discern, but it now seems likely that the economy is slowing, and recession is becoming a greater likelihood. However, the probability remains uncertain. FED actions will be taken, and we hope they are not too little, nor too late. This may require emergency action, and soon.

Market interest rates are beginning to ease, and the Yield Curve seems on the verge of ending its long inversion period. These remain some hopeful signs for a “soft landing,” as the FED likes to say. One thing is coming into focus – the Fed will cut interest rates on or before the September meeting. In fact, there is a reasonable (and growing) probability of at least a ½% cut.

Is the Fed going to save the day? A piece of advice from someone who has been around a long time: don’t count on it for your investment planning.

Van Wie Financial is fee-only. For a reason.

In this week’s Blog post, we continue our criticism of the U.S. Tax Code. Remember the old saying about not wanting to watch sausages or laws being made? The Code itself represents the worst and most contentious lawmaking by elected officials with diametrically opposite opinions. From the original Code, which contained a total of 27 pages, the size and complexity of the current Code has grown to tens of thousands of pages, understood by very few.

Due to large tax demands on our earnings, an entire industry has grown for the dual purposes of Code compliance and tax minimization. Most Americans utilize accountants, attorneys, and/or investment managers annually. The Code is simply too complex for all but the most qualified practitioners.

Conceptually, our American tax system should be fair to all who fall under its mandates. I have no misconceptions about that remote possibility, but our lawmakers should continually strive to achieve that status. Any lawmakers who adopt the fairness challenge will face a long road ahead.

In recent Blogs, we have discussed the Marriage Penalty, as well as some Inflation-indexing already built into the Code. Both fall short of achieving Code fairness. This week, we look at Code provisions that claim to be inflation-indexed but, in reality, represent an injustice commonly found in rules for Retirement Accounts (a topic near and dear to Van Wie Financial).

Stepped indexing applies to items such as IRA (Individual Retirement Account) contribution limits, which do rise, but only when the CPI rises enough over time to exceed a predetermined increase, such as $500 or $1,000. The same is true for so-called “catch-up contributions,” which are additional limits for people ages 50 and up. In times of moderate inflation, several years may go by without allowing our contribution limits to grow, creating another de facto tax increase in the non-adjustment years.

Since changes are applied to the Tax Code annually, it would be no more burdensome for taxpayers to up their annual contributions by smaller amounts, matched to actual (government-calculated) inflation. Over time, the extra dollars invested over the years would compound to enhance retirement incomes for Americans. After all, that’s why we take on personal responsibility for our own financial futures.

Contributions to company-sponsored Retirement Accounts work essentially the same way, although the numbers are larger than for IRAs. Nonetheless, during many tax years, participants are unable to step up their contributions (deductible or not) to reflect actual inflation, until the next “step” is authorized.

Of government and sausage, I’ll have the bratwurst. No plant tour, please.

Van Wie Financial is fee-only. For a reason.

Inflation creates an insidious and regressive tax on the American citizenry. Rising prices generally outpace increased earnings. Add the tax effect, whereby increased incomes are depleted by our marginal income tax rates, and our individual purchasing power suffers. In times of rampant inflation, as we have experienced since COVID-19, purchasing power erodes at an accelerated and often painful pace.

In the late 1970s and early 1980s, as the country was experiencing Carter Era hyperinflation, presidential candidate (and later President) Ronald Reagan recognized the phenomenon of “Bracket Creep.” Under our so-called “progressive” tax system, higher earners pay increasingly higher percentages of their income in Federal Income Tax. Incomes rose in response to inflation, but tax brackets were not changed in response. Taxpayers found themselves in higher brackets, resulting in further reduction of after-tax purchasing power. Bracket Creep.

This week’s topic, Statutory Items, are hard numbers in the Tax Code, changeable only by Congressional action. One classic example is the $3,000 limit for deducting investment losses in excess of investment gains on an annual basis. This number has been fixed (by statute) at least back to 1978, and with this fixed limit, Americans suffer an annual de facto tax increase through the failure of Congress to inflation-index the deductible limit. Based on an inflation calculator, it should be at least $14,456 today.

A more recent example emanates from the Tax Cut and Jobs Act of 2017 (TCJA), in which the deductibility of State and Local Taxes (SALT) was statutorily limited to $10,000 annually. This number is also not inflation-adjusted.

Neither example is adjusted for filing status, granting the same number to Married couples Filing Jointly (MFJ) as to Single Filers (SF). Logically, the MFJ limit should be double. Inflation indexing during the years since 2017 would produce a substantially larger deduction for affected taxpayers ($12,817 and $25,634, for SF and MFJ, respectively). Again, a de facto tax increase results during any year in which inflation occurs.

Statutory provisions in the Tax Code are guaranteed to penalize taxpayers during inflationary times. I see no reasonable excuse for “freezing” dollar-based items in a Tax Code that claims to be inflation-indexed. The only winner in this process is the U.S. Treasury (through the IRS), and in this case, they certainly did not do anything to earn their windfall.

Van Wie Financial is fee-only. For a reason.

Individual Income Taxes were (re)born in 1913, having appeared briefly (1862 – 1872) to finance the Civil War, and again for one year in 1894, when the tax on income was found unconstitutional. Hence, the 16^th Amendment (allowing an income tax) was permanently installed in 1913, and the rest is history.

Over decades of change, the U.S. Tax Code has become an ever-morphing leviathan, consuming increasing portions of our earnings and investments. While the term “fairness” is abused in discussions of the Code, we could improve actual fairness with some changes. Today, we look at the so-called “Marriage Penalty,” which taxes Married Filing Jointly (MFJ) relatively higher than Single Filers (SF).

Based on the Equal Protection clause in our Constitution (14^th Amendment), any tax system should treat singles the same as married couples under the Code.

A few of the ways they aren’t equal today include:

• Mandated Federal Tax Withholding (FICA and Medicare) are applied to each earner, forcing a working couple to double-pay, while a family with one worker, with the same earned income, pays only once. (The non-working spouse is benefit-eligible based on the working spouse.)
• Prior to the Tax Cuts and Jobs Act of 2017 (TCJA), State and Local Tax Deductions (SALT) were unlimited, but under TCJA, the maximum deduction is $10,000 annually, whether for MFJ or SF. (MFJ should be $20,000 to be equalized.)
• Additional Medicare Tax (0.9%) applies to incomes above $200,000 for Single, but only $250,000 for MFJ, short of equality by $150,000.
• Medicare premiums in addition to the base rates (called IRMAA, for Income-Related Monthly Adjustment Amounts), are applied to the top 2 income brackets disproportionately by $250,000 for MFJ.
• AMT (Alternative Minimum Tax) exemptions apply to singles up to $85,700, but only up to $133,300 for MFJ, $38,200 short of parity.
• Long-term Capital Gains and Qualified Dividend Tax rates at the 15% rate apply to Single filers up to $492,000, whereas MFJ rates apply only up to $553,850, short of parity by a whopping $430,150.
• IRA deductibility phases out for Single Filers at $87,000, but only at $143,000 for MFJ, short of parity by $31,000.
• Roth IRA contribution eligibility phases out at $161,000 for single, but only $240,000 for MFJ, short by $82,000 of being equal (and fair)

When Congress, along with our future president, will begin to rid us of the income tax Marriage Penalty once and for all, the Van Wie Financial Hour and this Blog will report on the progress. Don’t hold your breath.

Van Wie Financial is fee-only. For a reason.

Nearly 65 million people receive Social Security retirement income benefits monthly (data as of May 2024, from the Social Security Administration). A vast majority of recipients would rebel against any person or plan to reduce or eliminate their monthly benefits. Congress knows this, and only Congress can prevent the system from going broke, or even from reducing benefits.

While I share Americans’ limited respect for how Congress performs its overall duties and responsibilities, I also understand the dilemma they face, individually and as a lawmaking body. Our so-called Social Security Trust Fund will be dissipated in a decade or so, and the actual cash has already been spent, replaced with low-yielding Government Bonds. Those bonds are being redeemed on a daily basis, and will soon run out completely. At that point, monthly payouts will be reduced by about 25% for everyone, including current recipients. Unacceptable.

Any fix would require increased contributions to the Fund and/or a reduction in monthly payouts. Americans say ‘No!’ to both.

Examining current Bills in front of Congress, all supposedly introduced to solve the dilemma, we find their suggestions far less than serious. Here is what we have found so far:

• Fiscal Commission Act of 2023 would establish a “fiscal commission” to address the national debt and suggest changes to Social Security (passing the buck)
• You Earned It, You Keep It would repeal federal taxes on all Social Security benefits (decreasing income to the System)
• House Budget Committee Fiscal 2025 Budget would also establish a “fiscal commission” (see above comment)
• Boosting Benefits and COLAs for Seniors Act would require the Social Security Administration to determine future Cost-of-Living (COLA) increases using the Consumer Price Index (CPI) for Americans 62 years of age and beyond (hurting older people by reducing COLAs)
• Safeguarding Social Security and Medicare Act would require the U.S. Comptroller General to develop a Plan to protect benefits from inflation (raising costs)

Following years of inaction, it is officially too late to make necessary changes without some sacrifices. But it has to be done, and all that ever seems to happen in Washington, D.C. is talk.

Oh, and “taxing the rich.” That is certainly not problem-solving. Congress is unserious about the difficult but necessary work of preserving Social Security.

Van Wie Financial is fee-only. For a reason.